A recent move from federal regulators means that movie studios can now own theater chains. But given the rise of streaming platforms, the rule change may be too little, too late.
In a long-anticipated decision, the U.S. Department of Justice lifted the Paramount Consent Decrees, a 71-year-old set of antitrust rules regulating theater ownership among movie studios. But considering how much the video market has evolved in the last couple of years, analysts say studios are not likely to be eager buyers.
"It's a non-event. Nobody wants to own theaters," Wedbush analyst Michael Pachter said in an interview.
It is difficult to show growth in the theatrical business. U.S. exhibitors like AMC Entertainment Holdings Inc., Cinemark Holdings Inc. and Regal Cinema's owner Cineworld Group PLC are forced to be creative on pricing and concession-stand offerings to make up steady declines in admissions. Each major exhibitor has also launched ticket subscription services in an attempt to drive market share, even at the loss of ticket margins. And AMC's recent premium video-on-demand agreement with Comcast Corp.'s Universal Pictures is an ominous harbinger of where the box office business might be going: away from the multiplex.
Indeed, part of the rationale for the lifting of the consent decrees is that they are outdated, that the movie industry is in decline and the regulation is only preventing potential innovation. However, the restrictions are not necessarily the linchpin holding back meaningful change, analysts said.
Repealing the consent decrees technically allows movie studios such as Universal Pictures or Walt Disney Co. or AT&T Inc.'s Warner Bros. to acquire theaters at a time valuations are at rock-bottom lows following the coronavirus pandemic.
For example, AMC's market capitalization, or the total value of its publicly traded shares, has compressed to just $612.2 million as of market close Aug. 17, compared to Disney at $233.78 billion. Some analysts have speculated that a company like Disney could be interested in theater chains to open branded exhibition venues that leverage their intellectual property on a scale smaller than their theme parks.
There was also speculation earlier this year that Amazon.com Inc., with its mighty market cap of $1.594 trillion, might be interested in purchasing a theater chain as it continues to produce and distribute original films on its Prime streaming platform.
And indeed, analysts said theater chains may be facing a historic downsizing as properties close, making it a cheap time to buy.
"You're going to have some beleaguered assets as a result of the inability to operate," Fitch Ratings analyst Patrice Cucinello said in an interview.
But with new studios testing new streaming windows, the incentive for theater M&A is difficult to identify.
"It's irrelevant whether studios would be able to buy. That's not where the ball is going," Cucinello said.
Rather, studios are focused on their direct-to-consumer offerings — and for good reason. Disney's Disney+ platform attracted 60 million subscribers in the first nine months of operation, and the company recently said it would debut live-action blockbuster "Mulan" on the service instead of in theaters. After launching in May, AT&T's HBO Max platform is on target to hit 50 million subscribers and $5 billion in revenue by 2025. Those studios are following the lead of first-mover Netflix, Inc., which reported 27.3% year-over-year growth in subscribers at the end of the second quarter, even at 13 years of operation.
Comparatively, movie theater admissions have been on a slow but steady decline. From 2010 to 2019, theaters saw a 1.0% average annual drop in admissions, according to Kagan, a media research group within S&P Global Market Intelligence.
To stem those losses and show growth for investors, the major U.S. exhibitors pushed concession revenue up 5.2% year over year in 2019 to about half of ticket revenue, making those companies increasingly look like food and beverage vendors rather than movie exhibitors. Meanwhile, expenses continued to climb, eating into cash flows and margins.
"I think that there will always be a place for theaters in the distribution chain, especially when you're talking about major franchise films," Kagan analyst Wade Holden said in an interview. "But the way things are now, I think we'll see some theaters get shut down."